Thursday, April 2, 2015

Ricardo on Utility and Non-Reproducible Goods

From David Ricardo’s On the Principles of Political Economy and Taxation (3rd edn.; 1821), Chapter 1, “On Value”:

“It has been observed by Adam Smith, that ‘the word Value has two different meanings, and sometimes expresses the Utility of some particular object, and sometimes the power of purchasing other goods which the possession of that object conveys. The one may be called value in use ; the other value in exchange. The things,’ he continues, ‘which have the greatest value in use, have frequently little or no value in exchange; and, on the contrary, those which have the greatest value in exchange, have little or no value in use.’ Water and air are abundantly useful; they are indeed indispensable to existence, yet, under ordinary circumstances, nothing can be obtained in exchange for them. Gold, on the contrary, though of little use compared with air or water, will exchange for a great quantity of other goods.

Utility then is not the measure of exchangeable value, although it is absolutely essential to it. If a commodity were in no way useful,—in other words, if it could in no way contribute to our gratification,—it would be destitute of exchangeable value, however scarce it might be, or whatever quantity of labour might be necessary to procure it.

Possessing utility, commodities derive their exchangeable value from two sources: from their scarcity, and from the quantity of labour required to obtain them.

There are some commodities, the value of which is determined by their scarcity alone. No labour can increase the quantity of such goods, and therefore their value cannot be lowered by an increased supply. Some rare statues and pictures, scarce books and coins, wines of a peculiar quality, which can be made only from grapes grown on a particular soil, of which there is a very limited quantity, are all of this description. Their value is wholly independent of the quantity of labour originally necessary to produce them, and varies with the varying wealth and inclinations of those who are desirous to possess them.” (Ricardo 1821: 1–2).

There are three points here:

(1) Ricardo in paragraph two seems to be on the point of understanding subjective utility, but doesn’t quite get there, because he cannot seem to extend the word “gratification” to include subjective value.

(2) in Ricardo, exchange values of commodities with utility are determined by two factors: (1) scarcity and (2) the quantity of labour required to obtain them.

(3) when Ricardo discusses non-reproducible goods like antiques, pictures, scarce books, coins, and wines, he sees that the “inclinations of those who are desirous to possess them” have a major role in price determination. Again, he is grasping at the concept of subjective utility.

It seems to me that Marx’s labour theory of value (LTV) was a regression from Ricardo, because at least Ricardo allowed a fundamental role for scarcity in determining exchange value. In volume 1 of Capital, Marx dispensed even with scarcity as a fundamental determinant of exchange value, when clearly scarcity plays a major part in determining the prices of, say, primary commodities sold in flexprice markets.

And it is clear that Marx’s labour theory of value requires another limitation: it is limited not only to commodities produced for exchange but also to those that are readily reproducible commodities that can be considered fungible.

In volume 3 of Capital, Marx admits that the prices of things which “cannot be reproduced by labour, such as antiques, works of art by certain masters, etc. … may be determined by quite fortuitous combinations of circumstances” (Marx 1991: 772). So this eliminates another category of goods from those that supposedly can be explained by Marx’s LTV.

When we also consider that, for Marx, land, since it is not a product of labour, has no labour value, and hence its price is not explained by abstract labour time, we have increasingly more and more goods whose prices cannot be explained by LTV.

26 comments:

In volume 1 of Capital, Marx dispensed even with scarcity as a fundamental determinant of exchange value

This is demonstrably false. And I've already demonstrated it false. For those just joining us, see Capital volume 1, chapter 3:

"Magnitude of value expresses a relation of social production, it expresses the connexion that necessarily exists between a certain article and the portion of the total labour-time of society required to produce it. As soon as magnitude of value is converted into price, the above necessary relation takes the shape of a more or less accidental exchange-ratio between a single commodity and another, the money-commodity. But this exchange-ratio may express either the real magnitude of that commodity’s value, or the quantity of gold deviating from that value, for which, according to circumstances, it may be parted with. The possibility, therefore, of quantitative incongruity between price and magnitude of value, or the deviation of the former from the latter, is inherent in the price-form itself. This is no defect, but, on the contrary, admirably adapts the price-form to a mode of production whose inherent laws impose themselves only as the mean of apparently lawless irregularities that compensate one another.

"The price-form, however, is not only compatible with the possibility of a quantitative incongruity between magnitude of value and price, i.e., between the former and its expression in money, but it may also conceal a qualitative inconsistency, so much so, that, although money is nothing but the value-form of commodities, price ceases altogether to express value. Objects that in themselves are no commodities, such as conscience, honour, &c., are capable of being offered for sale by their holders, and of thus acquiring, through their price, the form of commodities. Hence an object may have a price without having value. The price in that case is imaginary, like certain quantities in mathematics. On the other hand, the imaginary price-form may sometimes conceal either a direct or indirect real value-relation; for instance, the price of uncultivated land, which is without value, because no human labour has been incorporated in it.

Whereas this has already been brought to your attention, you'll need to explain your insistence to the contrary.

In volume 3 of Capital, Marx admits that the prices of things which “cannot be reproduced by labour, such as antiques, works of art by certain masters, etc. … may be determined by quite fortuitous combinations of circumstances” (Marx 1991: 772). So this eliminates another category of goods from those that supposedly can be explained by Marx’s LTV.

Supposedly? Supposed by whom? Who told you the law of value regulates antiques, original works of art, unworked land, etc.? Do you have a name to attach to this claim?

All you show in your quotes is that Marx says that price cand and does deviate from a direct relationship to SNLT. I am already well are of this.

What I meant by "In volume 1 of Capital, Marx dispensed even with scarcity as a fundamental determinant of exchange value" is that Marx takes SNLT to the sole determinate of the **natural price** of commodities. That manifestly true in Chapter 1 of Capital.

Apart from the fact that very clearly said "price" and not "natural price" in your post, I have now asked you twice to define the phrase "natural price," as it is not a term in Marx's system. These requests have been met with silence.

It is obvious that in Chapter 1 of Capital Marx says that true exchange values are really an equality determined by equal abstract socially-necessary labour time. There you have your "natural " exchange value right there. When price reflects this it would be the natural price.

If he didn't believe that, you have just admitted Marxism is utterly bankrupt.

Anon, don't listen to LK on this; his claims about Marx's value theory remain suspect until he can demonstrate he is capable of restating it without error. I have spent the past week trying in vain to usher him to that point. The fact that he seems to resent any effort to ensure accuracy is hardly encouraging.

LK:

I don't believe the phrase "true exchange value" occurs anywhere in the book. In volume 1 he holds value and exchange value equal as a simplifying assumption that does not reflect reality, as I have demonstrated. If you dispute this, you are persisting in an obvious error that has been explained to you in detail. If you're comfortable with that, then I won't judge, but just be aware that the economic theory you're critiquing is not Marx's.

Continuing on, you appear to be saying "natural price," as you have introduced it (though I notice now you are saying "'natural' exchange value"), is the condition in which price is equal to value. Is this correct?

If so, then I suppose the statement "SNLT [is] the sole determinate of the **natural price** of commodities," would be true by construction: [value] is the sole determinant of [price when we hold price identical to value] of commodities. In other words, "A = B when B = A." Or, A = A.

Thing is, Marx never used this designation. The condition in which value = price is by NO means "natural," and those cases in which it happens in the real world are mere coincidences. So the very concept is frankly antithetical to his system.

So far, we have explicit statements by the theory's author that a commodity's price can diverge from its value, and an entire scholarly tradition with multiple interpretive camps that all reject your idiosyncratic interpretation (based, as it is, on an extremely limited and uncharitable reading).

So I guess it's time to ask The Question: If none of the above suffices, what would it take to convince you that individual prices diverge from individual values in this theory?

If he didn't believe that, you have just admitted Marxism is utterly bankrupt.

So Marxism is bankrupt if doesn't... use the concept of "natural price" as you have defined it? What kind of megalomaniacal nonsense is this? Seriously, this deserves an explanation.

As a further reminder, I asked: "Supposedly? Supposed by whom? Who told you the law of value regulates antiques, original works of art, unworked land, etc.? Do you have a name to attach to this claim?"

This trend of ignoring honest questions is really troubling. If you can't answer, just say so. Better to just admit one does not know something than to leave a misleading claim hanging in the air.

"In volume 1 he holds value and exchange value equal as a simplifying assumption that does not reflect reality, as I have demonstrated. ... The condition in which value = price is by NO means "natural," and those cases in which it happens in the real world are mere coincidences. "

That is plainly false, and indicates how desperately you -- like any Christian fundamentalist trying to harmonise the gospels -- will say anything to harmonise volume 3 of capital with volume 1.

"If none of the above suffices, what would it take to convince you that individual prices diverge from individual values in this theory? "

I've already made it clear that I understand that prices often diverge from direct determination by SNLT in Marx's system. You're just throwing up more straw man nonsense.

In fact, in one of the very first posts I did on LTV I referred to Marx's views here:

"The reason for this reduction is that in the midst of the accidental and ever-fluctuating exchange relations between the products, the labour-time socially necessary to produce them asserts itself as a regulative law of nature. In the same way, the law of gravity asserts itself when a person’s house collapses on top of him. The determination of the magnitude of value by labour-time is therefore a secret hidden under the apparent movements in the relative values of commodities.” (Marx 1982: 168).

"Christian fundamentalists," you holler, pulling out your favorite old number. You really don't even have the first clue, but keep swinging.

Apparently, Marx himself will "say anything to harmonize" volume 1 and 3, since he acknowledges price/value deviation in both volumes. As I showed.

I never want to see you use the phrase "ceteris paribus," since apparently simplifying assumptions are not things to be adopted or discarded to illustrate a relation, but rather a vow of faith that can never be broken. Because, you know, "Christians" and also reasons.

But never mind that, I have an idea. Since it's now clear that it's MARX you have a problem with, let's try something different. I'll humor your pugnacious obstinacy and say "Yeah buddy, MARX (*snicker*) contradicted himself between volumes 1 and 3. But this other guy, BARX, he didn't! He wrote a book called BAPITAL in three parts, and there's no contradiction. As a Barxist, your criticism does not apply to my theoretical orientation." So, let's hear it, what are your problems with the value theory forwarded by Barx?

I've already made it clear that I understand that prices often diverge from direct determination by SNLT in Marx's system. You're just throwing up more straw man nonsense.

FINALLY, you admit it. So you now accept value and price diverge in a given commodity. Which means you accept the volume 3 explanation, but not the volume 1 explanation. Good. So, how do we explain the disparity between them?

a) A simplifying assumption in volume 1 to illustrate a particular feature of the system -- the origin of profit -- which he then goes on to spell out.

b) Internal inconsistency. Marx made a grave error in volume 1, retained in subsequent editions, even as he was working on volume 3, and even as he admits IN VOLUME 1 that price and value are seldom the same for a commodity.

If you don't see the latter as requiring significant mental gymnastics to interpret as the more plausible one, then fine. We can still work with that, if your religion requires that Marx be wrong, since now we can say "well there were some errors in volume 1, but we both currently agree that those were not features of his theory, which we both acknowledge held price and value to vary among commodities." In other words, if you're focusing on the actual content of a theory, you should be able to look past a typo or alleged (and frankly implausible) conceptual error and actually address the ideas on their own merits.

At this point, you're saying "yeah, I get that Marx's theory says X, but you know what, he also said X' at one point so therefore X is wrong." So, is it wrong on the authority of an alleged error? What are you even arguing anymore, seriously?

If it was "A simplifying assumption in volume 1 to illustrate a particular feature of the system" Marx would have plainly said so. He doesn't. He makes it clear time and again that SNLT is a real determinant of price as analogous to an equilibrium system:

"The reason for this reduction is that in the midst of the accidental and ever-fluctuating exchange relations between the products, the labour-time socially necessary to produce them asserts itself as a regulative law of nature. In the same way, the law of gravity asserts itself when a person’s house collapses on top of him. The determination of the magnitude of value by labour-time is therefore a secret hidden under the apparent movements in the relative values of commodities.” (Marx 1982: 168).

Don't give me this nonsense that all this means is that it happens in the aggregate.

Something is profoundly different about value theory in vol 1 and vol. 3.

"b) Internal inconsistency"

Yup. That is correct. Deep and profound conceptual and theoretical contradiction and inconsistency.

I think all the alleged justifications of LVT have been found unconvincing. The most silly and stupid, in my opinion, is that Marx "exchange value" is something different than "natural price" of earlier authors. I'm not sure of what is your response to LK criticism. Anyway i agree LK is too drastic and emotional in his very negative judgement.

I don't see why one theory would be under any obligation to use the exact same set of variables and terms as a competing theory. But if you find it silly, then there's not a whole lot I can say about it. De gustibus non est disputandum, as they say.

So what do you mean by LTV? You mean if you utterly reformulate the theory and say something like labour costs form a large % of total average unit costs of many businesses that engage in mark-up pricing? Well, you can but so what?

That doesn't prove that the goods have some mysterious labour value attached to them that is distinct from price.

The Mark-up and target rate of return are chosen differently in different industries. The short answer is: they will be what businesses can get away with.

The profit mark-up is mostly determined by custom, convention, reasonableness, fairness and short and long-term competitive pressures (Lee, Frederic S. 1998. Post Keynesian Price Theory. Cambridge University Press, Cambridge and New York. p. 226), but in the long run there is no empirical reason to think profit rates equalise:

A fundamental point made by Marx and Engels against what they called utopians was that value and price inevitably differed. there were some utopians who said the solution to capitalism ills was to simply abolish money but not change the fundamental relations of capitalism. Marx called this Catholicism without the Pope. Engels pointed out that price deviations from value were a fundamental way that capitalism redistributed resources, it was a fundamental part of the capitalism dynamism.

I think your series of posts on Marx have revealed nothing but your own lack of understanding and lack of reading.

Your idea that profit is what businesses can get away with actually explains nothing, I don't know how you can keep a straight face when making claims like that and at the same time talking about economic science. This is about as far away from a scientific understanding as it is possible to get.

You should reflect sometime on your method of attacking things you clearly have little knowledge of. You need a long period of self criticism, as do we all.